Belhaven, North Carolina, Mayor Adam O’Neal speaks to walkers just outside town on Day 1 of The Walk for rural healthcare. Advocates who sought changes in rural healthcare policy walked 283 miles from Belhaven to Washinton, D.C.

Analysis: Why Rural Hospitals Are Closing

Revenue for small hospitals is based on how many patients they admit. A new proposal would help rural hospitals get paid for performing other critical health-care services, not just for how many beds they fill. The change is an effort to help more small hospitals stay in business.

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Rural hospital leaders are quick to blame Medicaid, Medicare, and federal regulations for their financial crisis. But the biggest reason so many rural hospitals are in danger of closing is because they don’t have enough patients. And under the current system of government reimbursements, patient stays are what pay the bills.

Since these hospital admissions are the primary mechanism through which hospitals get paid by Medicare and Medicaid, the lack of patients is creating big economic problems. That threatens all the other critical services hospitals provide that aren’t about inpatient care: emergency rooms, ambulance service, telemedicine, and skilled nursing.

A bill now before the Senate would help rural hospitals continue to provide these critical services without having to base billings just on inpatient stays.

How We Got Here

Small rural hospitals have been facing money troubles for a long time. In 1984 Congress changed the way Medicare paid hospitals. Instead of paying whatever hospitals claimed for taking care of Medicare patients, the agency began paying what it judged was reasonable for a particular illness.

That change was hard on a lot of hospitals, but the larger ones were able to live with it. For bigger hospitals, the length of patient stays averaged out. And, to the extent that Medicare was systematically underpaying, hospitals raised their charges to private insurance companies to make up the difference.

For very small hospitals, most of which were rural, that coping strategy didn't work as well. Medicare patients made up a larger percentage of their business. There weren’t enough patients for the law of averages to smooth out their losses on an occasional “bad case.” And there frequently weren’t enough privately insured patients to cover Medicare (and Medicaid) underpayment.

In 1997 Congress authorized the Critical Access Hospital system to help fix these problems. The new bargain was, if a hospital of up to 25 beds in a rural area would accept some limitations on how long a patient could stay (a practical way to require them to transfer complicated cases), Medicare would pay them what the hospital reported it cost to take care of Medicare patients.

Critical Access designation and cost-based payments helped, but eight special payment programs were created for special situations, such as when small hospitals had a large proportion of patients who were poor and unable to pay.

When Congress drafted the Affordable Care Act, it scheduled phase out of most of those special payment programs. The idea was, as more people got either private insurance or were enrolled in Medicaid, those special payments would no longer be necessary. Congress failed to anticipate the Supreme Court's judgment giving states the option to refuse to expand Medicaid to cover most poor people. Almost half of the states are refusing at the moment. Hospitals have given up the special payments, but, in states refusing Medicaid expansion, they're not getting the new revenue they expected. Most, but not all, of the hospital closures have been in those refusal states.

The second set of problems is regulatory. There are complex rules being imposed, suspended, delayed and generally fiddled with. One requires that a person stay through two midnights to be considered admitted to the hospital. Another rule requires that the admitting physician certify, in advance, that the person will be discharged within four days. But said physician has two weeks to sign the “pre admission certification”!

Mayor O'Neal holds up a picture of Portia Gibbs at a rally in D.C. at the end of the walk. Hospital closures are causing unnecessary deaths, he said.

The Decline in Patient Admissions

But the changes in Medicare, Medicaid, and federal regulations don’t explain the big financial change occurring at small, rural hospitals. The number of patients being admitted is declining.

The number of acutely ill patients admitted to the nation’s 1,340 Critical Access Hospitals is less than half of what it was in 1997. This number falls further each year, regardless of shifting regulations.

There are several reasons. The way doctors, patients, and insurance companies use hospitals is changing. In the past, a hospital was a place for a person to be cared for while they got well. Hence the name having to do with hospitality. Now patients are more likely to go to the hospital for a particular specialized procedure and recuperate elsewhere. Also, the cohort of patients most strongly inclined to use small rural facilities is dying off. Younger patients report that they have less confidence in smaller local facilities.

So Why Blame Regulations for the Crisis?

The political nature of the of the Affordable Care Act means that hospital administrators can’t argue for expanding Medicaid without getting governors and state legislators mad at them. And they don't like to talk about local people's decisions to get their inpatient care elsewhere. Therefore they focus their discussion of the hospital financial crisis on the federal regulatory burden. It's the truth but not the whole truth.

The fundamental issue is that the rural community hospital fulfills several important functions. It maintains an emergency room, rehabilitation facilities, a range of clinics, some local, some traveling. It may provide a base for all sorts of telemedicine consultations. It may operate the ambulance service and/or a home health agency.

The care of two or three or four inpatients is not its most important job, but the whole structure depends on inpatients for money. The need for a range of local, quickly available services remains, though, for many hospitals, the inpatients are going away. This in an obsolete way of supporting essential functions.

The act would let rural hospitals with fewer than than 50 beds, including Critical Access Hospitals, be re-designated as “Rural Emergency Hospitals.” Such hospitals could maintain an emergency room and ambulance and telemedicine services, as well as other traditional hospital functions, including convalescent skilled nursing care. But they could stop providing acute inpatient care. Medicare would pay the hospital 110 percent of its costs of emergency room and ambulance services. The hospitals would be permitted to charge Medicare for the costs of telemedicine back-up. The emergency rooms and physicians staffing them would have to meet some new quality requirements.

The bill would let small rural hospitals save money by getting out of the inpatient care business. They would be generously reimbursed for their emergency care, including “observing” patients, that is, keeping them for a day or so.

Would these changes be sufficient to keep failing small rural hospitals afloat? That depends on whether local people use them.

Wayne Myers is a retired pediatrician and rural medical educator. He directed the federal Office of Rural Health Policy from 1998 through 2000, and was president of the National Rural Health Association in 2003. He and his wife, JoAnn, farm in rural Maine.